Comment: Referendum fears dent confidence

The pound strengthened after David Cameron was returned to power. Picture: Getty
The pound strengthened after David Cameron was returned to power. Picture: Getty
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WELCOME to Blown Up Britain. Has there ever been an election with such an immediate and momentous outcome? What does it mean for markets and business? After an election in which the deeper problems of Scotland’s economy received scant attention, a relief rally hardly seemed appropriate.

Scottish business appeared largely unruffled – at least in public – by the portents of an SNP landslide and opinion polls pointing to a “too close to call” tie between Labour and Conservatives. But then lots of things did not much appear “in public” ahead of the election – not least reliable opinion poll forecasts.

We are in danger of settling for an economy functioning at well below capacity and for an erosion of competitive strength

But relief at UK level there has certainly been. And many Scots companies and business leaders felt immediate benefit.

On the stock market shares bounded ahead, with the FTSE 100 Index up by more than 115 points, or 1.7 per cent, in the first hour. The rally was led by banks such as RBS and Lloyds, energy utilities and property firms.

And on the foreign exchanges the pound jumped to $1.55 against the greenback, a gain of more than 1.4 per cent, while it scored its biggest rise against the euro in seven years.

Behind these upward moves was relief that business and the markets will now avoid weeks of uncertainty and horse trading and the looming prospect of another intense second election campaign later this year.

And relief there will be among many in business that they will not have to face higher rates of personal tax. At the same time the raising of the tax-free personal allowance to £12,500 (costing some £4 billion) should give a welcome boost to the take-home pay of millions.

How long might this euphoria last? Not long, if previous post-election rallies are any guide. And business will need tangible signs in the form of a boost to the annual investment allowance to convert that short-term relief into real business growth and expansion.

Fresh survey evidence due tomorrow from accountants and business advisers BDO is expected to show a resilient level of business confidence in Scotland. But it warns that tangible business-friendly policies should be put in place quickly if this level of confidence is not to fade away as it did in the aftermath of the 2010 election.

A quick fade away could very well result as business planners grapple with two imponderables ahead – concern over the consequences of a referendum on our EU membership (“Brexit”) and renewed pressure for a second Scottish independence referendum (“Scoxit”).

But there is another reason why business may soon be having second thoughts about the rosy glow of David Cameron back at Number 10. Cheering though this may be for firms down south, there is one immediate and glaring paradox about the outcome here: how the UK Conservatives would like to proceed and how the SNP in Scotland would like to proceed are not just badly realigned, they are in diametrically opposite directions. And the SNP stands to enjoy a big boost to its preferred direction of travel if, as seems probable, it enjoys further poll support in the Holyrood election next year. An SNP armed with more powers would wish to move towards “ending austerity”, boosting welfare spending, more money for the NHS and more money for public services and if necessary higher rates of personal tax at the top end to pay at least some of the bill. On this perspective a relief rally would hardly seem appropriate at all.

And there are problems that run deeper than even the Institute for Fiscal Studies forecasts of a Scottish annual budget deficit billowing out to £9.7 billion by 2019-20.

These problems are embedded in our economy and were well illustrated last week in a presentation by Professor Brian Ashcroft of the Fraser of Allander Institute (FoA). I’ve never been totally persuaded by the FoA’s Keynesian leanings and its belief that economic growth springs predominantly from the barrel of a well-oiled public spending gun. But there were key aspects of his analysis last week that were well made and compellingly presented.

Of note was the prominence he gave to the productivity challenge posed to the new UK government and UK and Scottish economic growth. The Scottish and UK recoveries, he notes, are not as secure as we might like to think. He cites economist Martin Wolf, who argues that the UK’s employment performance in the recovery is the mirror image of the collapse in growth of output per workers and output per hour. In November last year, output per hour in the economy was 1.7 per cent lower than it had been in February of 2008. He further argues that “such a long period of stagnation appears unprecedented at least since the 19th century”.

And this matters, because weak productivity growth means low real wage growth and less household spending. It also means higher unit costs and reduced competitiveness.

Now these points go to the heart of the UK’s underlying weakness, however impressive those much-quoted employment numbers might sound. We are in danger of settling complacently for an economy functioning at well below capacity and for an invisible erosion of competitive strength.

To this Ashcroft adds concerns over continued over-reliance on household spending, little real wage growth and growth forecasts reliant on rising household debt to 172 per cent of household income – even higher than the pre-crisis household debt of 168 per cent.

I am not so convinced that the other challenges Ashcroft cites – further fiscal tightening – 55 per cent done, 45 per cent still to do, mainly through public spending and welfare cuts, will be, as he says, “a major drag on the economy”. I would also argue he makes light of the contribution to innovation and growth made through higher levels of business start-up and the contribution of the SME sector. FoA has never set much store by this and this may explain why its economic forecasts in the recent past have tended to underplay the strength of the recovery, requiring in due course corrective upward revisions.

But I will not let disagreement here detract from the powerful points he makes on productivity and for this alone the University of Strathclyde is well served by this analysis. It deserves attention if the politicians really want to deliver on “a better future”. «